End it or Mend it?: A New America Debate on FFEL’s Future

Should the Federal Family Education Loan (FFEL) program be mended or ended? That was the subject of debate at an event on Tuesday hosted by the New America Foundation’s Education Policy Program.

On one side was Robert Shireman, a senior advisor at the U.S. Department of Education, who helped write the Obama administration’s plan to sunset the FFEL program and use the savings to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. The recent turmoil in the financial markets, he said, has exposed the risks that the federal government takes on by relying on private lenders to make government-backed loans to students. Without federal intervention, the whole program could have collapsed. “It’s not a system that assures that the loans are actually made,” he stated.

On the other side were representatives of the student loan industry, who urged the administration to abandon the proposal, which they said would be harmful to students, and instead work with them to reform the program. “I do believe the administration is approaching this from a sincere belief that they want to do the right thing and lenders, for the most part, don’t disagree with what the administration is trying to accomplish,” said Scott Fleming, director of the Chartwell Education Group, a lobbying firm that has represented lenders. “It’s simply that we disagree with how they put it in practice.”

The industry representatives said they were trying to find “a third way,” between maintaining the status quo and ending the program. But they acknowledged the hurdles of getting all the different types of players in the FFEL program to agree on an alternative plan.

“It’s going to be very difficult to get lenders and guarantors for that matter into some kind of agreement as to what it should be, public not for profit lenders, private sector lenders and so on,” said Paul Combe, president and chief executive officer of the student loan guaranty agency American Student Assistance. “It will take leadership, and I think that’s the point where it is an opportunity for the administration to take that leadership role and actually open up a dialogue.”

Shireman did not rule out considering other proposals, but he said that they would have to bring significant cost savings to the government and provide loan serving companies with the proper incentives to prevent borrowers from defaulting on their loans.

Jason Delisle, the research director of New America’s Education Policy Program, expressed skepticism over the loan industry’s willingness to change its ways. Any serious reform would have to take Congress out of the business of setting lender subsidies, he said. Given the loan industry’s “incredible opposition” to the PLUS Loan auction program, he said he would be “surprised if consensus emerged from the lending community around a third way that would have them competing for the subsidies they earn from the federal government.”

Video of the event is available here. A full transcript is available here.